When creating a partnership or limited liability company (LLC), it`s common to come across two important documents: the partnership agreement and the operating agreement. Both documents are essential in defining the relationship between partners or members, but they serve different purposes. In this article, we`ll discuss the differences between these two documents and what they entail.
Partnership Agreement
A partnership agreement is a legal document that sets out the rules and regulations that govern the relationship between partners. This document can be created when two or more individuals come together with the intention of starting a business or engaging in a business venture together. The agreement outlines each partner`s roles and responsibilities, and the expectations each has of the other.
The partnership agreement will usually define each partner`s respective capital contribution, profits and loss sharing, and how the partnership will be managed. The agreement outlines the steps to be taken in the event of a partner wanting to leave or if someone new wants to join the partnership. This document is like a roadmap that helps the partners avoid conflicts and misunderstandings that may arise during the course of running the business.
Operating Agreement
An operating agreement is a legal document that outlines how an LLC will be run. This document defines the day-to-day operations of the LLC, its structure, management, and ownership. It is a crucial document for any limited liability company and should be created during its formation. The operating agreement lays out who owns what percentage of the LLC, how profits and losses are allocated, and who will act as the LLC`s manager.
The operating agreement also defines the voting rights and procedures, how the LLC will be dissolved, and how disputes will be resolved. This document is like a roadmap that helps the members of the LLC avoid conflicts and misunderstandings that may arise during the course of running the organization.
The Difference between Partnership Agreement and Operating Agreement
The key difference between a partnership agreement and an operating agreement is that a partnership agreement is for general partnerships, while an operating agreement is for LLCs. Operating agreements are similar to partnership agreements, but they also include additional provisions that are specific to LLCs. For example, an operating agreement will outline how profits and losses are allocated among members, while a partnership agreement focuses on how profits and losses are shared between partners.
In summary, a partnership agreement and an operating agreement serve different purposes but are both essential when forming a partnership or LLC. It is recommended to have these documents in place to avoid conflicts and misunderstandings that may arise during the course of running the business. If you`re looking to establish a business with a partner or as an LLC, it`s important to consult with an attorney to create strong and comprehensive legal agreements.